Chapter 6
Strategy Analysis & Choice
Strategic Management:
Concepts & Cases
11th Edition
Fred David
Copyright 2007 Prentice Hall
Ch 6 -1
Chapter Outline
The Nature of Strategy & Choice
A Comprehensive
Strategy-Formulation Framework
The Input Stage
Copyright 2007 Prentice Hall
Ch 6 -2
Chapter Outline (cont’d)
The Matching Stage
The Decision Stage
Cultural Aspects of Strategy Choice
Copyright 2007 Prentice Hall
Ch 6 -3
Chapter Outline (cont’d)
The Politics of Strategy Choice
Governance Issues
Copyright 2007 Prentice Hall
Ch 6 -4
Strategy Analysis & Choice
To acquire or not to acquire, that is the
question –
Robert J. Terry
Life is full of lousy options –
General P.X. Kelley
Copyright 2007 Prentice Hall
Ch 6 -5
Strategy Analysis & Choice
Nature of Strategy Analysis & Choice
-- Establishing long-term objectives
-- Generating alternative strategies
-- Selecting strategies to pursue
-- Best alternative - achieve mission & objectives
Copyright 2007 Prentice Hall
Ch 6 -6
Strategy Analysis & Choice
Alternative Strategies Derive From -





Vision
Mission
Objectives
External audit
Internal audit
Past successful strategies
Copyright 2007 Prentice Hall
Ch 6 -7
Strategy Analysis & Choice
Generating Alternatives -Participation in generating alternative
strategies should be as broad as
possible
Copyright 2007 Prentice Hall
Ch 6 -8
Comprehensive Strategy-Formulation
Framework
Stage 1:
The Input Stage
Stage 2:
The Matching Stage
Copyright 2007 Prentice Hall
Stage 3:
The Decision Stage
Ch 6 -9
Strategy-Formulation Analytical
Framework
Internal Factor Evaluation
Matrix (IFE)
Stage 1:
The Input Stage
External Factor Evaluation
Matrix (EFE)
Competitive Profile Matrix
(CPM)
Copyright 2007 Prentice Hall
Ch 6 -10
Stage 1: The Input Stage
Basic input information for the matching &
decision stage matrices
Requires strategists to quantify subjectivity
early in the process
Good intuitive judgment always needed
Copyright 2007 Prentice Hall
Ch 6 -11
Strategy-Formulation Analytical
Framework
SWOT Matrix
SPACE Matrix
Stage 2:
The Matching Stage
BCG Matrix
IE Matrix
Grand Strategy Matrix
Copyright 2007 Prentice Hall
Ch 6 -12
Stage 2: The Matching Stage
Match between organization’s internal
resources & skills and the opportunities & risks
created by its external factors
Copyright 2007 Prentice Hall
Ch 6 -13
Stage 2: The Matching Stage
SWOT Matrix
Strengths
Weaknesses
Opportunities
Threats
Copyright 2007 Prentice Hall
Ch 6 -14
SWOT Matrix
Four Types of Strategies
Strengths-Opportunities (SO)
Weaknesses-Opportunities (WO)
Strengths-Threats (ST)
Weaknesses-Threats (WT)
Copyright 2007 Prentice Hall
Ch 6 -15
SO Strategies
Strengths
Weaknesses
Opportunities
Threats
SWOT
Copyright 2007 Prentice Hall
SO
Strategies
Use a firm’s
internal strengths
to take advantage
of external
opportunities
Ch 6 -16
WO Strategies
Strengths
Weaknesses
Opportunities
Threats
SWOT
Copyright 2007 Prentice Hall
WO
Strategies
Improving internal
weaknesses by
taking advantage
of external
opportunities
Ch 6 -17
ST Strategies
Strengths
Weaknesses
Opportunities
Threats
SWOT
Copyright 2007 Prentice Hall
ST
Strategies
Use a firm’s
strengths
to avoid or
reduce the impact
of external
threats
Ch 6 -18
WT Strategies
Strengths
Weaknesses
Opportunities
Threats
SWOT
Copyright 2007 Prentice Hall
WT
Strategies
Defensive tactics
aimed at reducing
internal
weaknesses &
avoiding
environmental
threats
Ch 6 -19
SWOT Matrix
Developing the SWOT
List firm’s key internal
Strengths
List firm’s key internal
Weaknesses
List firm’s key external
Opportunities
List firm’s key external
Threats
Copyright 2007 Prentice Hall
Ch 6 -20
SWOT Matrix
Strengths – S
Weaknesses – W
List Strengths
List Weaknesses
Opportunities – O
SO Strategies
WO Strategies
List Opportunities
Use strengths to take
advantage of
opportunities
Overcoming weaknesses
by taking advantage of
opportunities
Threats – T
ST Strategies
WT Strategies
List Threats
Use strengths to avoid
threats
Minimize weaknesses and
avoid threats
Leave Blank
Copyright 2007 Prentice Hall
Ch 6 -21
Matching Key Factors to Formulate Alternative Strategies
Key Internal Factor
Key External Factor
Excess working capacity
(strength)
20% annual growth in
the cell phone industry
(opportunity)
Insufficient capacity
(weakness)
Strong R&D (strength)
Poor employee morale
(weakness)
+
Resultant Strategy
=
Acquire Cellfone, Inc.
Exit of two major foreign
+ competitors from the
=
industry (opportunity)
Pursue horizontal integration
by buying competitor's
facilities
Decreasing numbers of
young adults (threat)
Develop new products for
older adults
+
+
Copyright 2007 Prentice Hall
Strong union
activity (threat)
=
=
Develop a new
employee benefits
package
Ch 6 -22
Limitations with SWOT Matrix



Does not show how to achieve a competitive
advantage
Provides a static assessment in time
May lead the firm to overemphasize a single
internal or external factor in formulating
strategies
Copyright 2007 Prentice Hall
Ch 6 -23
Strategy-Formulation Analytical
Framework
SWOT Matrix
SPACE Matrix
Stage 2:
The Matching Stage
BCG Matrix
IE Matrix
Grand Strategy Matrix
Copyright 2007 Prentice Hall
Ch 6 -24
SPACE Matrix
Strategic Position & Action Evaluation Matrix
Aggressive
Conservative
Defensive
Competitive
Copyright 2007 Prentice Hall
Ch 6 -25
SPACE Matrix
Two Internal Dimensions
Financial Strength (FS)
Competitive Advantage (CA)
Copyright 2007 Prentice Hall
Ch 6 -26
SPACE Matrix
Two External Dimensions
Environmental Stability (ES)
Industry Strength (IS)
Copyright 2007 Prentice Hall
Ch 6 -27
SPACE Factors
Internal Strategic Position
Financial Strength (FS)
Return on investment
Leverage
Liquidity
Working capital
Cash flow
External Strategic Position
Environmental Stability (ES)
Technological changes
Rate of inflation
Demand variability
Price range of competing products
Barriers to entry
Competitive pressure
Price elasticity of demand
Ease of exit from market
Risk involved in business
Copyright 2007 Prentice Hall
Ch 6 -28
SPACE Factors
Internal Strategic Position
External Strategic Position
Competitive Advantage CA
Industry Strength (IS)
Market share
Product quality
Product life cycle
Customer loyalty
Competition’s capacity utilization
Technological know-how
Control over suppliers & distributors
Growth potential
Profit potential
Financial stability
Technological know-how
Resource utilization
Ease of entry into market
Productivity, capacity utilization
Copyright 2007 Prentice Hall
Ch 6 -29
Steps to Developing a SPACE Matrix
Select a set of variables to define FS, CA,
ES, & IS
Assign a numerical value:
1.
2.
1.
2.
3.
From +1 to +6 to each FS & IS dimension
From -1 to -6 to each ES & CA dimension
Compute an average score for each FS,
CA, ES, & IS
Copyright 2007 Prentice Hall
Ch 6 -30
Steps to Developing a SPACE Matrix
1.
2.
3.
Plot the average score on the appropriate
axis
Add the two scores on the x-axis and plot
the point. Add the two scores on the y-axis
and plot the point. Plot the intersection of
the new xy point
Draw a directional vector from the origin
through the new intersection point.
Copyright 2007 Prentice Hall
Ch 6 -31
SPACE Matrix
FS
Conservative
Aggressive
+6
+5
+4
+3
+2
+1
CA
IS
-6
-5
-4
-3
-2
-1
+1
-1
+2 +3
+4
+5
+6
-2
-3
-4
Defensive
-5
Competitive
-6
Copyright 2007 Prentice Hall
ES
Ch 6 -32
Strategy-Formulation Analytical
Framework
SWOT Matrix
SPACE Matrix
Stage 2:
The Matching Stage
BCG Matrix
IE Matrix
Grand Strategy Matrix
Copyright 2007 Prentice Hall
Ch 6 -33
BCG Matrix
Boston Consulting Group Matrix
Enhances multi-divisional firm in formulating
strategies
Autonomous divisions = business portfolio
Divisions may compete in different industries
Focus on market-share position & industry
growth rate
Copyright 2007 Prentice Hall
Ch 6 -34
BCG Matrix
Relative Market Share Position
Ratio of a division’s own market share in an
industry to the market share held by the largest
rival firm in that industry
Copyright 2007 Prentice Hall
Ch 6 -35
BCG Matrix
Relative Market Share Position
Industry Sales Growth Rate
High
1.0
Medium
.50
Low
0.0
High
+20
Stars
II
Question Marks
I
Cash Cows
III
Dogs
IV
Medium
0
Low
-20
Copyright 2007 Prentice Hall
Ch 6 -36
BCG Matrix
Question Marks
Low relative market share – compete in highgrowth industry
Cash needs are high
Case generation is low
Decision to strengthen (intensive strategies) or
divest
Copyright 2007 Prentice Hall
Ch 6 -37
BCG Matrix
Stars
High relative market share and high growth rate
Best long-run opportunities for growth & profitability
Substantial investment to maintain or
strengthen dominant position
Integration strategies, intensive strategies, joint
ventures
Copyright 2007 Prentice Hall
Ch 6 -38
BCG Matrix
Cash Cows
High relative market share, competes in lowgrowth industry
Generate cash in excess of their needs
Milked for other purposes
Maintain strong position as long as possible
Product development, concentric diversification
If weakens—retrenchment or divestiture
Copyright 2007 Prentice Hall
Ch 6 -39
BCG Matrix
Dogs
Low relative market share & compete in slow or
no market growth
Weak internal & external position
Liquidation, divestiture, retrenchment
Copyright 2007 Prentice Hall
Ch 6 -40
Strategy-Formulation Analytical
Framework
SWOT Matrix
SPACE Matrix
Stage 2:
The Matching Stage
BCG Matrix
IE Matrix
Grand Strategy Matrix
Copyright 2007 Prentice Hall
Ch 6 -41
The Internal-External Matrix


Positions an organization’s various divisions
in a nine-cell display
Similar to BCG Matrix except the IE Matrix:


Requires more information about the divisions
Strategic implications of each matrix are different
Copyright 2007 Prentice Hall
Ch 6 -42
Copyright 2007 Prentice Hall
Ch 6 -43
IE Matrix

Based on two key dimensions



The IFE total weighted scores on the x-axis
The EFE total weighted scores on the y-axis
Divided into three major regions



Grow and build – Cells I, II, or IV
Hold and maintain – Cells III, V, or VII
Harvest or divest – Cells VI, VIII, or IX
Copyright 2007 Prentice Hall
Ch 6 -44
Copyright 2007 Prentice Hall
Ch 6 -45
Strategy-Formulation Analytical
Framework
SWOT Matrix
SPACE Matrix
Stage 2:
The Matching Stage
BCG Matrix
IE Matrix
Grand Strategy Matrix
Copyright 2007 Prentice Hall
Ch 6 -46
Grand Strategy Matrix
Tool for formulating alternative strategies
Based on two dimensions
Competitive position
Market growth
Copyright 2007 Prentice Hall
Ch 6 -47
RAPID MARKET GROWTH
1.
2.
3.
4.
5.
6.
WEAK
COMPETITIVE
POSITION
1.
2.
3.
4.
5.
Quadrant II
Market development
Market penetration
Product development
Horizontal integration
Divestiture
Liquidation
1.
2.
3.
4.
5.
6.
7.
Quadrant III
Retrenchment
1.
Concentric diversification
2.
Horizontal diversification
3.
Conglomerate
diversification
4.
Liquidation
SLOW MARKET
Copyright 2007 Prentice Hall
Quadrant I
Market development
Market penetration
Product development
Forward integration
Backward integration
Horizontal integration
Concentric diversification
Quadrant IV
Concentric diversification
Horizontal diversification
Conglomerate
diversification
Joint ventures
STRONG
COMPETITIVE
POSITION
GROWTH
Ch 6 -48
Grand Strategy Matrix
Quadrant I
Excellent strategic position
Concentration on current markets/products
Take risks aggressively when necessary
Copyright 2007 Prentice Hall
Ch 6 -49
Grand Strategy Matrix
Quadrant II
Evaluate present approach
How to improve competitiveness
Rapid market growth requires intensive
strategy
Copyright 2007 Prentice Hall
Ch 6 -50
Grand Strategy Matrix
Quadrant III
Compete in slow-growth industries
Weak competitive position
Drastic changes quickly
Cost & asset reduction (retrenchment)
Copyright 2007 Prentice Hall
Ch 6 -51
Grand Strategy Matrix
Quadrant IV
Strong competitive position
Slow-growth industry
Diversification to more promising growth areas
Copyright 2007 Prentice Hall
Ch 6 -52
Strategy-Formulation Analytical
Framework
Stage 3:
The Decision Stage
Copyright 2007 Prentice Hall
Quantitative Strategic
Planning Matrix
(QSPM)
Ch 6 -53
QSPM
Quantitative Strategic Planning Matrix
Technique designed to determine the relative
attractiveness of feasible alternative actions
Copyright 2007 Prentice Hall
Ch 6 -54
Strategic Alternatives
QSPM
Key External Factors
Economy
Political/Legal/Governmental
Social/Cultural/Demographic/
Environmental
Technological
Competitive
Weight
Strategy 1
Strategy 2
Strategy 3
Key Internal Factors
Management
Marketing
Finance/Accounting
Production/Operations
Research and Development
Computer Information
Systems
Copyright 2007 Prentice Hall
Ch 6 -55
Steps to Develop a QSPM
1.
2.
3.
Make a list of the firm’s key external
opportunities/threats and internal
strengths/weaknesses in the left column
Assign weights to each key external and
internal factor
Examine the Stage 2 (matching) matrices,
and identify alternative strategies that the
organization should consider implementing
Copyright 2007 Prentice Hall
Ch 6 -56
Steps to Develop a QSPM
4.
5.
6.
Determine the Attractiveness Scores
Compare the Total Attractiveness Scores
Compute the Sum Total Attractiveness
Score
Copyright 2007 Prentice Hall
Ch 6 -57
QSPM
Limitations
Requires intuitive judgments & educated
assumptions
Only as good as the prerequisite inputs
Copyright 2007 Prentice Hall
Ch 6 -58
QSPM
Advantages
Sets of strategies considered simultaneously or
sequentially
Integration of pertinent external & internal
factors in the decision making process
Copyright 2007 Prentice Hall
Ch 6 -59
Cultural Aspects of Strategy
Choice
Organization Culture
Successful strategies depend on the degree of
consistency with the firm’s culture
Copyright 2007 Prentice Hall
Ch 6 -60
Politics of Strategy Choice
Politics in Organizations
Management hierarchy
Career aspirations
Allocation of scarce resources
Copyright 2007 Prentice Hall
Ch 6 -61
Politics of Strategy Choice
Political Tactics for Strategists
Equifinality
Satisfying
Generalization
Higher-order issues
Political access on important issues
Copyright 2007 Prentice Hall
Ch 6 -62
Governance Issues
Board of Directors Roles & Responsibilities
Control & oversight over management
Adherence to legal prescriptions
Consideration of stakeholder interests
Advancement of stockholder rights
Copyright 2007 Prentice Hall
Ch 6 -63
Corporate Governance Issues
Business Week’s “Principles of Good Governance”
1. No more than 2 directors are current or former company
executives
2. No directors do business with the company
3. Audit, compensation, and nominating committees made up
of outside directors
4. Each director owns a large equity stake in the company
5. At least one outside director with extensive experience
6. Fully employed directors sit on no more than 4 boards –
Retirees on no more than 7
7. Each director attends at lest 75% of all meetings
Copyright 2007 Prentice Hall
Ch 6 -64
Corporate Governance Issues
Business Week’s “principles of good governance”
8. Board meets regularly without management present
9. Audit committee meets at least four times a year
10. Board is frugal on executive pay, diligent in CEO succession,
and prompt to act when trouble arises
11. CEO is not also the Chairperson of the Board
12. Shareholders have considerable power and information to
choose & replace directors
13. Stock options are considered a corporate expense
14. No interlocking directorships
Copyright 2007 Prentice Hall
Ch 6 -65
For Review (Chapter 6)
Key Terms & Concepts
Aggressive Quadrant
Business Portfolio
Attractiveness Scores
(AS)
Cash Cows
Boards of Directors
Competitive Advantage
(CA)
Boston Consulting
Group (BCG) Matrix
Competitive Quadrant
Copyright 2007 Prentice Hall
Ch 6 -66
For Review (Chapter 6)
Key Terms & Concepts
Conservative Quadrant
Dogs
Culture
Environmental Stability
(ES)
Defensive Quadrant
Financial Strength
(FS)
Directional Vector
Governance
Copyright 2007 Prentice Hall
Ch 6 -67
For Review (Chapter 6)
Key Terms & Concepts
Grand Strategy Matrix
Internal-External (IE)
Matrix
Halo Error
Matching
Industry Strength
(IS)
Matching Stage
Input Stage
Quantitative Strategic
Planning Matrix (QSPM)
Copyright 2007 Prentice Hall
Ch 6 -68
For Review (Chapter 6)
Key Terms & Concepts
Question Marks
Stars
Relative Market Share
Position
Strategic Position & Action
Evaluation (SPACE)
SO Strategies
Sum Total Attractiveness
Score (STAS)
ST Strategies
Sustainability
Copyright 2007 Prentice Hall
Ch 6 -69
For Review (Chapter 6)
Key Terms & Concepts
Strengths, Weaknesses
Opportunities, Threats SWOT
WO Strategies
Total Attractiveness
Scores (TAS)
WT Strategies
Copyright 2007 Prentice Hall
Ch 6 -70